The overhaul of the reverse mortgage program continues as the Department of Housing and Urban Development recently proposed more changes aimed at making the Home Equity Conversion Mortgage (HECM) program stronger than ever. But these changes have the potential to cost new borrowers a lot more money, says a recent Kiplinger article.
The goal of these specific rules is to help reduce the default rate on the loans, which is currently at about 10%. Last year, the rule was made that borrowers must prove that they are able to afford their property taxes and insurance for the entire duration of the loan, the article explains.
But now, HUD has proposed an addition to the list of property charges: utilities. This would mean that if a homeowner with a reverse mortgage wasn’t able to keep up on their utility bills then the loan would go into default.
“HUD doesn’t want more folks kicked out of their homes,” the article writes. “Adding utilities to the covered property charges means the financial ability to cover that cost much be considered in the financial assessment that borrowers must pass.”
Failing this financial assessment wouldn’t automatically disqualify a potential borrower, but it may mean that the lender is required to carve out a “set aside” from the loan proceeds.
The other proposed change made by HUD that has the potential of costing borrowers more money is the cap on adjustable-rate loans. If the proposed rule is passed, there would be a 1% point annual cap and a 5% point lifetime cap on interest-rate changes for an adjustable loan.
This would mean that there’s a potential that the lowered caps may cause lenders to charge higher initial rates, Peter Bell, president of the National Reverse Mortgage Lenders Association, says in the article.
Many borrowers could be affected by this rule because currently, adjustable-rate loans are currently the most popular choice among borrowers.
Read the full Kiplinger article.
Written by Alana Stramowski